Monday, January 7, 2013

All's Not Well in Shangri-La

Why doesn't 11.8%
growth mean Gross National Happiness in BhutanBhutan's 11.8 percent real GDP growth -- as the USA careens at the 'fiscal
cliff' of government insolvency and the economies of Europe crash -- has
astonished economists.

Bhutan is landlocked in the eastern Himalayas, wedged between China above and
India holding its rump and sides. Because the kingdom controls several key
Himalayan passes, it represents a strategic military imperative for India.
India underwrites 60 percent of Bhutan's annual budget expenditures. China
builds roads on the uncharted common border with Bhutan, establishing de
facto territorial rights while 'continuing discussions' to define disputed
borders.

Indian military engineers, through the Border Roads Organization (BRO) build
and maintain high altitude roads and bridges, clearing landslides, avalanches
and snow which are regular through the year. While Bhutan gets vital
infrastructure, India gains a strategic presence.

India bankrolls hydropower construction
Bhutan's Himalayan perch has powerful rivers raging during the heavy
summer rains, which are a natural source for hydropower electricity
generation. Harnessing that creates surplus electricity which Bhutan can plug
into the Indian national power grid for export earnings. The economic
expansion in India is constrained by shortfalls in electricity supply for its
rapidly growing manufacturing sector, commercial offices and luxury
residential developments.

India has funded major hydroelectric construction since Bhutan's Fifth
Economic Plan (1981-87) with a combination of grants and long term loans for
the Chhukha, Tala and Kurichhu facilities. A Punatsangchhu Project is
underway, expected to come onstream in 2015. Bhutan has planned for 10,000 MW
hydropower generation capacity by 2020 with Indian government funding.

The hydropower plants of Chhukha (336 MW), Kurichhu (60 MW), Tala (1.020 MW)
and Basochhu (24 MW) were consolidated under the Druk Green Holding Company
to manage export of power to India. Bhutan Power Corporation manages domestic
electricity supply and builds mini hydroelectric power plants to serve
isolated communities off the national power grid.

Both corporations suffer seasonal shortfalls in power when the long dry
winter months reduce river flows. They then import power from India at
increased prices which leaves them with marginal annual net losses. That is
another irritant in Bhutan-India economic relations.

The power sector's role as the main economic driver through strong export
earnings allows domestic supply to be subsidized through deeply discounted
'Royalty Power'. This has spurred an ambitious rural electrification program
from 17 percent in 1995 to 60 percent by 2009 and is on track for 100 percent
coverage by 2013.

Rural programs need to distribute economic benefits
Rural electrification brings ancillary benefits: school children have
lighting to study after dark, power is available for cottage industries to
mechanize to improve productivity, there is option to establish factories to
process and package agricultural produce for export. Economic planners now
have vital power infrastructure to promote private sector investment in manufacturing
at farming and cottage industry locations.

There is a concerted administrative effort to de-centralize planning and to
distribute implementation responsibility to district levels (Dzongkhags).
However the weight of tradition and lack of educated youth willing to return
to their villages to modernize and innovate, leaves the pace of rural
development lethargic. Despite increasing availability of electricity, rural
households follow tradition by cooking with forest wood and heating with
kerosene, LPG and firewood. That is also a factor of incomes which have not
moved much for the rural folk. The primary rural economy remains disconnected
from the secondary and tertiary sectors.

About 40 percent of the 317,000 population (July 2012 est.) are subsistence
farmers tending livestock and working cash crops on the 2.3 percent arable
land. There is an aggregate of only 400 sq.km. of irrigated agriculture . The
population is widely dispersed at a density of 15 persons per sq.km. in small
and across 38,394 sq.km of mostly uninhabitable mountain terrain.

Rural youth migration into the capital Thimpu, without a sufficient safety
net of gainful employment, has led to a spike in drugs and petty crime not
seen before. Thimpu itself, once a green, lush, riverine township bounded by
Himalayan peaks, has been concreted over with squat commercial and
residential blocks. Construction dust is in the air. Traffic jams are
commonplace. The capital is not an advertisement for Gross National Happiness
(GNH) -- a concept for which Bhutan is applauded internationally.

Dependence on India a mixed blessing
The import of capital equipment for the massive hydropower projects, trucks
and bulldozers for construction, expertise to build and operate, Indian
manual labor for stone-breaking plus interest-bearing loan repayments, add to
Bhutan's widening trade deficit and external debt.

There is increasing resentment within Bhutan that infrastructure and
hydropower investments drain the treasury without benefiting domestic labor
or local contractors. Many see Indian investments as self-serving value to
Indian companies, manpower and government.

The outflow of rupees led to the 'Rupee Crunch' shock of 2010-11 which
disrupted cross-border petty trade. That was exacerbated by the Bhutan
government's closure of rupee bank accounts held by Indian traders, who then
spirited out their hundreds of millions of rupees at speed. This followed
pressure applied by the Indian government as the traders were evading tax at
home and profiting unduly by under-invoicing imports -- scamming the Bhutan
government as well.

The World Bank September 2011 update notes that Bhutan's GDP share of
agriculture fell from 25 percent in FY 2002-03 to 14 percent in FY 2010-11.
Some attribute that to the inefficiencies and low productivity of subsistence
agriculture, plus the abundance of supply from India at affordable rates. In
2011 Bhutan spent about Rs 4 Billion on imports of meat, dairy products,
coffee, tea, rice, cooking oils and sugar. There is debate about the
negligence of agricultural development at policy level in government.

One major concern is the level of external debt, which reached 82.7 percent
of GDP in 2011. The Bhutan Chambers of Commerce report on the rupee crunch
pointed out that government budget expenditures rose from Nu 9.8 billion in
FY 2002-03 to Nu 38 billion in 2011-12 and that 60 percent of government
expenditure was for imports from India. It cautioned that increasing
government expenditure without a corresponding increase in domestic savings
leads to a current account deficit which is unsustainable.

Increase in private vehicles imported from India is another contributing
factor to the Rupee crunch -- a civil service quota is available to all
government employees. And government is the biggest employer in Bhutan. There
were 1,103 vehicles imported from India in 2002 at a value estimated at Nu
310 Million. That escalated to 6,893 car imports in 2011 at Nu 3.6 Billion.
The number of vehicles on the roads also increases the need for fuel imports
from India.

The government has since imposed a strict use of the Nulgrum as the primary
currency for all trade within Bhutan. All goods have to be bought from
suppliers within the country. That will create its own distortions to the
supply chain and lead to various other work-arounds by traders.

The stellar 11.8 percent GDP growth spawns a litany of problems. How Bhutan
uses its rising export income from hydropower for equitable social
development and to balance its trade deficit is a challenge. How India can
find ways to help its little neighbor survive GDP success is another matter.
All of which confirm the Fourth King's assertion in the 1970s that GDP is a
very limited indicator of national progress. Asia Sentinel